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Study of Incentives wins the 2014 Nobel Prize in Economics

I was so excited to find out this morning that Jean Tirole won the 2014 Nobel Prize in Economics. When I think of Prof. Tirole, I usually think of him together with his long-time collaborator, Jean-Jacques Laffont, who unfortunately passed away in 2004. Together, Tirole and Laffont wrote some insightful economic analysis that has heavily influenced my thinking on economics and, judging from the tributes (e.g. here from Justin Wolfers), many other economists. So, my excitement was tinged with a bit of sadness that Prof. Laffont did not see this day when the hard work of him and Prof. Tirole was recognised as worthy of the Nobel Prize. There work, applied game theory, principal-agent theory, asymmetric information and contract theory to how markets in the real world work. They did this by understanding the incentives between buyers and sellers in these markets instead of assuming that all markets were perfectly competitive. And, importantly they also looked at if it was feasible if government could intervene in markets that were imperfect. Tirole and Laffont have definitely influenced many regulators and policy-makers, and I’m glad Prof. Tirole won the Nobel Prize now because I think some of his and Laffont’s insights bear repeating. (more…)